How Seniors Can Protect Their Retirement Accounts From Rising Inflation

The intensity of inflation is a persistent foe. Both young workers and retirees alike feel the weight of a marketplace that is gradually getting more expensive. No matter what kinds of goods you might frequently or intermittently purchase, you've undoubtedly noticed they've gotten more expensive over the years. Average inflation fluctuates between 2% and 3% long term, but recent years have seen a concerning boost to inflation rates. According to MacroTrends data, 2020 saw a 1.23% inflation rate, but every year since then has seen significantly higher rates (4.7%, 8%, and 4.12% in the three years following).

Many factors can play a role in causing inflation, along with related effects that can further impact the setting and managing of your budget (such as how shrinkflation can affect consumer purchases). Combatting inflation can be particularly important for seniors who may be operating on a fixed income after retiring from the workforce. Wherever you find yourself in the later stages of life, there are actually a few key tips and tricks you can use to protect yourself and your finances from the ever-threatening effects of inflation. Many of these tips begin with solid investment principles, but not every solution involves risking your retirement savings through new and risky investment opportunities.

One of the most effective things you can do to protect your retirement accounts is to hold off on drawing from them, most commonly achieved by delaying your retirement. Seniors who remain in the workforce and delay their exit by a year or more can gain significant benefits. For starters, by continuing to work you can retain your paychecks. Plus, the longer you can delay the shift in your income the more time your investment capital has to grow. According to data analysis from The Motley Fool, the S&P 500 experiences a compound annualized growth rate of about 10% per year (or 6.8% after factoring in inflation). While each year is unique, if your retirement account grows each year that you delay retirement you could be looking at tens of thousands of additional dollars as well as a reduction in the amount of time you'll need this money to support you.

Plus, one additional year of work allows you to continue contributing to your retirement accounts from your regular salary. It's also a good idea to consider delaying the start to your Social Security benefits. If you continue to work you won't need to start drawing Social Security benefits in most cases. Each additional year you put off the start of this flow of retirement income boosts its value to you by roughly 8% (up to a maximum of a 124% payout rate at age 70).

Another way to combat inflation is to ensure that any extra money you have set aside for retirement is invested when possible, as opposed to held in cash. Naturally, once you make the decision to leave the workforce you should keep some cash, in addition to maintaining an emergency fund. These funds will best serve you when stored in a high interest savings account that is easily accessible rather than in stocks or bonds. However, beyond these specific funds, every dollar that you don't need in the short term should remain invested in your high value growth assets. Defeating inflation is a numbers game, and any asset you have in cash immediately turns into a losing proposition. Cash does not appreciate in value, so any money you aren't earning interest on is actually losing value over the long term.

Once you hit retirement, it may be a good idea to rebalance your portfolio in order to buy a greater volume of wealth protection instruments. Stock market tools like index funds grow with the market as a whole and generally don't see the same level of fluctuation that individual company stocks exhibit. As long as your investments are growing by at least the same amount as inflation — which averages roughly 2.5%– your wealth will remain unfazed by its negative impact. However, a growth factor above the inflation rate will see your assets continue to increase in value.

Some retirees and people nearing this transition might want a more assured financial footing. While investing in stocks and other higher risk options isn't for everyone, there is one surefire way to lock in growth without exposing yourself to potential downside pressure. Bonds and annuities are investment opportunities that deliver guaranteed payout rates, eliminating the risk of losing money on your investments altogether. There is a downside to this approach in that these kinds of investments don't produce the same level of upside potential as other alternatives, and some can take a long time to mature. Even so, it's possible to find annuities and bond offerings that rise above the average inflation rate so that you can better protect your retirement funds long term. 

Another potential approach is to use inflation-protected annuities or I bonds. Rather than just locking in your rate of return, they guarantee that your investment payout will be adjusted alongside the inflation rate (I bonds feature an added inflation rate adjustment that is reset every six months and combined with the base interest rate). However I bonds have a penalty if you withdraw before the 5-year mark so they might be a better approach for those still planning ahead for retirement rather than those who have already retired. This delivers locked in profits that will protect your principal while also helping you to defend your finances against the constant enemy that is inflation.

Another investment-specific option that retirees might tap into involves targeting investments that historically track alongside inflation. Market segments and specific commodities that tend to overperform when the inflation rate increases can be useful when it comes to staving off the worst effects of inflation. Commodities like oil, for instance, tend to increase in price when inflation is at its highest. You could also choose to invest in an exchange-traded fund (or ETF) that specifically tracks commodity assets rather than individual stock holdings. Investing in this kind of solution gives you some built-in protection against inflation because when prices rise so, too, does the value of your investment.

However, it's worth remembering that assets that overperform during periods of high inflation will frequently see their fortunes tumble when the opposite forces come into effect across the market. Therefore, it's a good idea to engage in routine rebalancing or only buying into these kinds of inflation-opposing investments as part of a wider portfolio diversification strategy. This will give you a measure of protection without exposing you to the potentially negative side effects of overweight investments and portfolio in any particular category.

Portfolio diversity is crucial to any value protection strategy. However, one particular type of asset can tack on more extreme inflation defense than others (and can still fit in with an effort to spread your investments across sectors). Investing in stocks that deliver high yielding dividend payouts is a great way to protect the principal value of your holdings while also extracting cash to support your ongoing retirement lifestyle. Taking this a step further, many investors target what are known as dividend aristocrats rather than just looking for high yield selections.

Companies fitting the label of dividend aristocrat have increased the payout rate of their dividend value on a yearly basis for at least 25 consecutive years. Buying in to these not only gives you a decent level of confidence that future dividends will continue to increase (although certainly not a guarantee), but also that the longer you hold one of these assets the more it will pay out in an exponential curve. Your earnings per share will skyrocket over the long term, infusing tremendous value. This can act as an effective way to mount a defense against inflation while also protecting the underlying value of the assets held in your retirement accounts.

It's extremely important to understand that sometimes you will still need to engage in cost cutting in order to make your way successfully through a period of increased inflation. Sometimes things get tougher to manage and it's important to prepare yourself for the potential need to cut spending in the short term so that you can continue to enjoy all the fruits of your labor long into the future.

The trouble affecting retirees, in particular, is that increased spending early in their retirement can lead to bigger problems later on. The money a person has saved for retirement isn't just a pool of resources to draw from indiscriminately, but rather an income generator that requires a retiree to leave as much of the principal intact as possible. The lower the amount you pull out from your resources the more capital remains available to continue growing. An inflation rate like the 8% that was experienced in 2022 isn't just an issue for that year alone. By drawing out more money to keep your lifestyle stable, you are borrowing against your future to pay for things in the here and now. When inflation gets particularly dangerous, seniors should be prepared to limit spending in certain categories such as eating out at restaurants or going on lavish vacations. Alternatively, these kinds of expenditures might be important to you as you traverse your golden years, so making cuts elsewhere, like in your subscription services or club memberships might serve your particular goals more effectively.